The Student Loan Interest Rate Vote

The Chronicle of Higher Education has a detailed description of the changes and controversy surrounding today’s legislation to be voted on in the House of Representatives. The article is quoted in full below, in order to provide public education on this legislation:

The Democratic leaders of the U.S. House of Representatives are taking aim at the largest student-loan providers to pay for the lawmakers’ plan to halve the interest rate on federal student loans.

Democratic lawmakers are planning to hold a vote this week on legislation that would gradually reduce the student-loan interest rate, to 3.4 percent from 6.8 percent, over the next five years.

In discussions with college lobbyists, aides to the Democratic leaders revealed how the lawmakers propose to pay for the proposal, which is expected to cost the government about $5.9-billion over that time period. Nearly one-third of the money needed to pay for the interest-rate cut would come from savings generated by reducing the profit margin that the top private lenders receive on federal loans.

In the guaranteed-loan program, the government ensures lenders a rate of return that is separate from and usually higher â€” at least over the last decade â€” than the rate students are charged.

Under the Democratic plan, the top 1 percent of lenders, who hold 90 percent of the loan volume, would see the guaranteed rate reduced by 0.1 of a percentage point. For example, the current rate that lenders are guaranteed is 7.72 percent. Under the proposal, the rate would drop to 7.62 percent.

The lawmakers said that about 30 lenders would be affected, including Sallie Mae, the nation’s largest student-loan provider, Citibank, Wells Fargo Bank, and Bank of America.

Loan-industry officials wasted no time attacking the proposal. “This penalizes the lenders that have shown the deepest commitment to the program by their size,” said John Dean, a lawyer for the Consumer Bankers Association.

Critics of the student-loan industry said that limiting the rate reductions to the largest lenders was a savvy move, as it would protect Democrats from one of the Republicans’ main lines of attack. “This insulates the Democrats from charges that their proposal will force small lenders out of the loan program,” said a student-loan analyst who did not want to talk publicly until the bill was formally unveiled.

Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and the Workforce, was planning to introduce the bill late last week.

Other Proposed Changes

In addition to the cut in the rate of return that the top lenders receive, Democrats plan to propose making changes in the guaranteed-loan program, effective July 1, that would:

Reduce the amount of money that the government reimburses lenders for loans that go into default, from 97 cents to 95 cents of every dollar that is unpaid.

Eliminate a program in which the government fully reimburses lenders it deems “exceptional performers” for loans that are not repaid. The department awards this designation to lenders that it believes provide the most reliable service to students.

Increase to 1 percent, from 0.5 percent, the one-time fee that lenders in the guaranteed-loan program must pay the government when making student loans.

Reduce to 20 percent from 23 percent the amount guarantee agencies can keep for themselves from the money they recover from borrowers who default. The proportion would drop to 16 percent by 2010.

In a written statement, Joe Belew, president of the Consumer Bankers Association, said that if Congress made those changes, “the ability of lenders to invest in technology, enhance customer service, and offer benefits to borrowers” would be put at risk.

The bankers’ group noted that Congress cut the payments that lenders receive from the government by $8-billion last year, as part of legislation pushed by Republicans to reduce the federal budget deficit.

“This program, which has been highly reliable and serves students attending 80 percent of all U.S. colleges and universities, cannot sustain annual deep budget cuts without the quality of services to borrowers being hurt,” the bankers’ group said.

But Democrats and advocates for students defended the planned cuts, noting that most of them had been proposed by the Bush administration and Congressional leaders. For example, President Bush had called for cutting the amount of money that the government reimburses lenders for defaulted loans as part of his 2006 fiscal year budget request. The Senate, meanwhile, passed a budget-cutting bill last year that would have eliminated the Education Department’s program for rewarding lenders it deems exceptional.

The Democrats also pointed to a report put out by financial analysts at Citigroup last week that said the proposed cuts would be “manageable” for Sallie Mae. The analysts actually characterized the news as positive for Sallie Mae because the proposed cut in the rate of return for top lenders was less severe than they had initially feared.

My opinion, for what it’s worth: Yes, that’s right, big bankers, we’re asking you to shoulder some of the costs of this proposal. Why? Because we will all benefit from a less debt-ridden, better-educated populace.

3 thoughts on “The Student Loan Interest Rate Vote”

[…] Currently, we are watching House Democrats debate and vote on legislation to cut interest rates on student loans. HR 5 will amend the Higher Education Act of 1965 to reduce interest rates for student borrowers. You can track its passage here. Kiersten has already written about the battle that big banks and Republicans will wage on this issue.Â And she has a good article describing the changes by the Chronicle of Higher Education: The Democratic leaders of the U.S. House of Representatives are taking aim at the largest student-loan providers to pay for the lawmakersâ€™ plan to halve the interest rate on federal student loans. […]